Teas, Milk Drinks Fill Out
Coca-Cola's Lineup in Japan

A vending machine on a narrow shopping street in Tokyo's Setagaya section tells a lot about the state of
Coca-Cola Co.
in Japan today.

Although the big machine is emblazoned with the red Coca-Cola logo, only three of the 25 cans behind the glass contain the familiar cola. The others are Coke products that most of the world never sees: an Asian tea called Sokenbicha, an English tea called Kochakaden, a coffee drink called Georgia and a fermented-milk drink called Lactia.

This array of non-colas is at the heart of Coke's two-year attempt to recover from an embarrassing stumble a few years ago, when other companies' teas and new carbonated drinks started to lure away its customers. In 1994, Coke mapped out a three-pronged counterstrategy: Mimic rivals' new-beverage ideas, declare war on other colas and sodas, and use a nationwide army of vending machines to build and recover market share quickly.

"When you start losing share, it focuses the mind," says Steve Jones, marketing head for Coca-Cola's Japanese unit.

Since 1994, Coke has reignited growth by introducing more than 30 new drinks. Sales in volume over the first six months of 1996 were up 10% from the same period in 1995, and Coke's share of the cola market is expanding again, rising to 85% from 78% in 1995, according to Nielsen Japan K.K. And Coca-Cola has made itself king of the Japanese vending machine, with nearly half of the machines in Japan stocked with Coke products.

"Coke used to have trouble with product development -- with its speed and coming up with new localized products -- but they've gotten faster and smarter," says Noboru Kosaka, an industry analyst with market-research firm Nikkan Keizai Tsushinsha K.K.

Coke's rapid turnaround shows the lengths to which U.S. companies must go to survive over the long term in fast-moving Japanese markets. While many foreign exporters are just discovering the Japanese consumer, Coke has managed to prosper in Japan since it entered the market four decades ago. The payback for Coke is big: Japan is among the world's biggest soft-drink markets, with three trillion yen ($25.77 billion) in annual sales.

It used to be much easier in Japan for Coca-Cola, which for years dominated the soft-drink market with its carbonated offerings. In 1990, it sold nine out of every 10 colas in Japan and controlled more than 30% of the entire soft-drink market including noncarbonated drinks.

Then the ground shifted. Not only did consumers increasingly prefer less-sweet, noncarbonated drinks, but they became much more fickle, discarding brand loyalties for the latest fad drink. Companies like Suntory Ltd. and Asahi Soft Drinks Co. grabbed customers with new concepts such as Asian teas, fruit-flavored sodas and fermented-milk drinks. Now Japan is among the world's most competitive soft-drink market: As many as 1,000 new products are launched each year, nearly 90% of which disappear after as little as a few weeks.

By that standard, Coke's Sokenbicha has had formidable staying power. Coke introduced the sugarless, blended Asian tea in late 1994 after rival Asahi pioneered the market for such teas. Sokenbicha has already taken more than half of Japan's $1.46 billion blended-tea market, according to Nielsen.

Coke's Lactia, introduced last March, quickly grabbed 20% of the $56 billion fermented-milk drink market -- to the dismay of Japan's Calpis Food Industry Co., which created the market in 1991 when it introduced a canned fermented-milk drink called Calpis Water. Since Lactia's launch, Calpis's market share has fallen from more than 60% to below 50%, according to the company.

"Coca-Cola is mean and scary," says Yozo Nakao, marketing manager for Calpis Water. "They have deep pockets, and these days they study us closely and challenge us with all these me-toos -- that's something they never did before."

Coke's Mr. Jones bridles at such comments. "The word copycat doesn't exist in our strategy at all," he says; rather, he says, the company improves on competitors' product ideas. True, Coke has "entered categories that other people have been in first," Mr. Jones concedes. But he asks: "Is that copying them? Not at all."

As for Lactia, Mr. Jones says: "Lactia is a whole new valued-added product ... and is completely different from Calpis [Water] or other competitive lactic products."

Consumer acceptance of Coke's new products has been facilitated by its vending-machine network. Coke controls 870,000 of the two million drink machines that stand on nearly every street corner and train platform in Japan and has plans to add another 150,000 machines over the next two years. Vending machines have been a key strategy for Coke in Japan, allowing the company to circumvent inefficient, insufficient distribution systems.

The network also allows it to push products into prime display space even if they are late to market. Coke "can almost always make any good beverage into a top brand -- almost instantly," says Kazuo Sunago, a marketing expert at the advertising firm Dentsu Inc.

The more Coca-Cola succeeds with new beverages, the less important its flagship product looks. While the company expects its combined sales in Japan of teas and coffees to have hit 400 million cases in 1996, up sharply from 315 million cases in 1995, it admits sales of carbonated drinks will remain flat at roughly 265 million cases.

Yet Coke has had to work hard even to keep those sales. In recent years, Coke has come under attack from drinks aimed at a growing number of young consumers who prefer lower-carbonated, low-sugar sodas of various fruit flavors. To encourage them to stay with Coke, the company since 1995 has been test-marketing a new cola called Radio -- an easy-to-drink cola with less carbonation, less sugar and less intensity, which Coke executives sometimes jokingly call "Coke Less."

In 1994, competitors flooded Japan with generic colas, encouraged by a strong yen that made it cheaper to import inexpensive drinks. Supermarket and convenience chains sold the no-name brands at the equivalent of about 35 cents to 50 cents a can, well under the 95 cents charged by Coke. Coca-Cola did offer discounts to some superstores but otherwise disdained price cutting. Instead, it launched a huge television-advertising campaign to convince consumers that Coke was fresher and better tasting than the no-names. One commercial, made in separate versions for different regions of Japan, showed Coke trucks rolling out of local bottling plants and into recognizable nearby neighborhoods. The company also started selling Coke in new glass and plastic contoured bottles and other packages to discourage consumers from comparing it with generic colas strictly on price.

Today, generic colas are hard to find at all in Japan. No-name colas were "sensational when they first came out," says Michiharu Endo, who manages a 7-Eleven store in Tokyo. In 1994, Mr. Endo featured generics in prime display space. But like other convenience stores, he stopped carrying generic colas late last year. "In the end," he says, "the brand name won."